[Update 11:45 UTC, July 31: Adds Kalshi's response in the sixth and seventh paragraphs.]

New York State has filed a lawsuit against prediction market platform Kalshi, accusing the company of running an illegal, unlicensed gambling business through its offering of event contracts tied to sports, elections, and other outcomes.

The lawsuit seeks to halt Kalshi's alleged illegal gambling activities within the state. It also demands that the company forfeit any illegally obtained gains, provide restitution to affected users, and pay civil penalties amounting to three times those gains.

"No matter what they call themselves, prediction markets like Kalshi are gambling platforms, plain and simple," Attorney General Letitia James said in a statement on Friday. "We are taking them to court to uphold our laws and protect New Yorkers."

The legal action follows a cease-and-desist order that the New York State Gaming Commission issued to Kalshi in October 2025. Kalshi subsequently sued the regulator in federal court. In July, a judge denied Kalshi's request for a preliminary injunction, and an appeals court later rejected the company's attempt to block enforcement while the appeal is pending.

"It's sad to see this type of political theater from the leadership in our own state. States can't just shut down a federally licensed exchange," Elisabeth Diana, Kalshi's head of communications, said in a statement shared with Cointelegraph.

"This would also hurt New Yorkers, who would be driven offshore," she added.

CFTC Defends Federal Oversight of Prediction Markets

The lawsuit intensifies a growing jurisdictional dispute over whether event contracts offered by federally regulated prediction markets fall under state gambling laws. Kalshi operates as a designated contract market under CFTC licensing, and the core legal question is whether that federal designation shields the platform from state-level gambling enforcement.

Shortly before New York filed its case, the Commodity Futures Trading Commission (CFTC) filed an emergency motion seeking to block New York's enforcement actions. The agency argued that the state's measures interfere with its exclusive authority under the Commodity Exchange Act to regulate designated contract markets such as Kalshi.

The CFTC has adopted comparable positions in disputes involving at least nine states, contending that allowing individual states to prohibit event contracts listed by federally regulated exchanges would result in conflicting state-level rules and weaken federal commodities regulation. The resolution of these overlapping disputes bears on whether prediction market platforms operate under a unified federal framework or must navigate varying state-by-state restrictions.

Prediction Markets Continue to Gain Mainstream Traction

Prediction markets enable users to buy and sell contracts linked to the outcomes of future events, with contract prices reflecting the market's estimated probability that a given event will occur.

Kalshi's competitor, Polymarket, has also drawn regulatory scrutiny, with several countries restricting or investigating its operations over gambling and licensing concerns.

Kalshi began expanding into blockchain-based infrastructure in December 2025, launching tokenized prediction markets on Solana and subsequently adding support for multiple blockchain networks.

The broader prediction market sector has expanded in tandem with major sporting events. According to analytics firm Chainalysis, blockchain-based prediction markets processed approximately $20 billion in trading volume tied to the 2026 FIFA World Cup, with more than 400,000 wallets participating. That growth has unfolded even as platforms operate under unresolved regulatory frameworks, making the Kalshi-New York dispute a closely watched test case for the industry's legal standing in the United States.